Wishes, expectations and actions: a survey on price formation in election stock markets

With error-prone and biased individual traders, can markets aggregate trader information and produce efficient outcomes? We review election stock market evidence that suggests this does happen. Individual traders appear biased and error-prone consistently, yet these markets prove quite efficient in predicting election outcomes. We also review work which documents comparable, but substantially different, phenomena in related laboratory markets. In addition, we report the results from a new laboratory session which shows how we can create particular biases that mirror those in election stock markets. Finally, we discuss how combined laboratory and field experiments can help us understand trader/market interactions. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: C9; D4; G1.